Expanding on the somewhat outdated info in my tax article in the TUG Advice section, here's more than you ever wanted to know....
Deductible Items
Unless you rent your timeshare to others, you likely will have no deductible amounts related to the timeshare. However, if the property taxes applicable to your unit are billed separately to you (such as in California), those are deductible. They are also deductible if your resort shows them as a separate item on your MF billing. However, if you have to seek out the amount applicable to your unit by examining the financial statements, the taxes are not deductible.
A few owners can deduct the interest expense on a timeshare loan. The interest is deductible only if the loan is secured by the timeshare as a mortgage and you deduct no other mortgage interest except on your primary home. Note that most timeshare loans don't qualify because they are written as consumer loans rather than as mortgages.
Forget about trying to use your timeshare in your business to get depreciation, MFs and other deductions. There is a rule in the tax law that prohibits any business deduction pertaining to an "entertainment facility". Timeshares fit into that category. There are a very few narrow exceptions to this rule.
Sale of a Timeshare
If you sell a timeshare and have a gain, it's taxable.
If you sell a timeshare and have a loss, it's not deductible (with one exception). Suppose you say it's an investment. Can't you then deduct the loss, just as you would with a loss on the sale of stock? No, not if you use the timeshare yourself, exchange it, or let friends or relatives use it. Even though your intent might be to hold it as an investment, your personal use results in no tax loss being allowed upon sale.
The single exception allowing a loss on sale is if you rent the timeshare regularly. In such a case, the loss on sale is deductible and will normally be deductible as an ordinary loss (it's actually called a Section 1231 loss). Note, however, that your "cost" for determining the loss is the fair market value (resale value) at the date you convert the timeshare to a rental property.
Annual rent
If you rent your timeshare, you can deduct all current expenses, including depreciation, against the rental income. If you have net rental income for the year, it's taxable.
If you have a net rental loss, you cannot deduct the loss. How come?
First, it's certainly legitimate to deduct rental expenses to offset rental income. However, with timeshare rentals, there are some limitations to deducting those expenses if you incur a loss.
Assuming that like most timeshare owners, you typically rent to tenants for one week or less at a time, your rentals don't qualify as a "rental" business. A special section of the Income Tax Regulations prohibits treating your loss as a “rental loss” if the average rental period for a particular tenant is seven days or less.
Even most tax advisors are not aware of this rule. Your tax advisor can review §1.469-1T(e)(3)(ii)(A) of the Temporary Income Tax Regulations. This regulation is also referred to in IRS Letter Ruling #9505002, which gives an indication of the IRS position on this issue as it relates to timeshares, as discussed above.
So what happens to the loss if it's not treated as a rental loss? It falls into the passive activity loss rules of §469 of the Internal Revenue Code. Those rules prohibit deducting such losses except against other passive activity income. Such income is narrowly defined and doesn't include, for example, dividends, interest or other investment income.
Thus, you're pretty much stuck with carrying over such losses to use against positive taxable income from your rental activities in future years. You can also deduct any carryover losses related to a rental property in the year you sell that timeshare.
There are a number of complex rules that could change the result here - including the vacation home rules, rules relating to renting to tenants for longer than one week at a time, etc.
Vacation Home Rules
Wouldn't the vacation home tax rules apply to a rental gain, allowing you to avoid reporting the income, because you rented the property for fewer than 15 days?
The simple answer is that you must report the profit - whether you own one week or a number of weeks. Why? Don't the vacation home rules apply to exempt from income tax income for rentals of less than 15 days? No, the vacation home rules don't apply.
The vacation home rules apply only if you use the "vacation home" for at least 15 days each year for personal purposes. A timeshare can qualify as a vacation home. However, unless you own at least four weeks at a single resort, using at least three of the weeks for personal purposes, you can't take the benefit of excluding the income from renting the fourth week.
Thus, in almost every situation, you must report the profit. You can also offset losses from some rentals against profits on others to minimize your net taxable income, but deducting a net loss is still subject to the rules above.